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When Will a Nonprofit Corporation That Works with a For Profit Corporation Lose the Charitable Property Tax Exemption?

A nonprofit company should generally maintain a solid boundary between its activities and those of a related for profit company. A recent decision of the New Jersey Supreme Court highlighted why this is so important.

In that case, the Court held that nonprofit companies could lose their property tax exemptions if they commingle their affairs with affiliated entities that operate for profit. International Schools Services v. West Windsor Township, 207 N.J. 3 (N.J. 2011).

The plaintiff, International Schools Services, Inc. (ISS), was a nonprofit corporation that ensured that American children living overseas receive a quality education. In 1999, ISS created Independent Schools Group, Inc. (ISG), a for profit corporation that provided insurance and investment services to the educational community abroad. In 2002, ISS created ISS Financial and Insurance Network Inc. (ISSFIN), a for profit corporation that provided insurance services to ISS clients. The headquarters of both ISG and ISSFIN was located on ISS-owned property in West Windsor, New Jersey. Both ISG and ISSFIN paid below-market rates for their lease of the office space and ISS issued an unsecured loan to ISG. Additionally, ISS’ president was a member of the board of directors for both for profit entities.

West Windsor granted ISS a property tax exemption from 1990 through 2001 under New Jersey Statute 54:4-3.6. However, after reviewing the entity’s activities, the town revoked the exemption based on ISS’ close relationship with ISG and ISSFIN. The Tax Court rejected the plaintiff’s appeal and the Appellate Division partially agreed.

In 1984, the New Jersey Supreme Court set out three criteria for a nonprofit corporation to meet in order to secure a tax exemption for its real property:

  1. It must be organized exclusively for the moral and mental improvement of men, women and children.
  2. Its property must be actually and exclusively used for the tax-exempt purpose.
  3. Its operation and use of its property must not be conducted for profit.

Paper Mill Playhouse v. Millburn Township, 95 N.J. 503, 506 (N.J. 1984).

The Legislature has since amended the second prong of the test, removing the requirement of exclusivity and instead permitting an exemption for property that is “actually used” in connection with tax-exempt functions. The Court considered this change and asked “whether the Legislature’s elimination of the exclusivity requirement allows a nonprofit entity to conduct for profit activities in a commingled fashion on its owned and occupied property.” International Schools Services at 6.

The Court determined that the Legislature did not intend for such a result, because doing so would allow a nonprofit entity “to claim a property tax exemption when it has become inseparably entangled with for profit entities” and thus “would allow indirect taxpayer subsidization of those entities.” Id. at 42. The Court upheld West Windsor’s denial of the tax exemption “because the commingling of effort and entanglement of activities and operations by ISS and its profit-making affiliates was significant and substantial, with the benefit in the form of direct and indirect subsidies flowing only one way – from ISS to the for profit entities.” Id. at 4.

This decision is important for nonprofit companies that have close corporate relations with for profit companies that might jeopardize their ability to receive tax exemptions. It suggests that allowing a nonprofit entity to get too close – financially or otherwise – with a for profit entity could leave the nonprofit without the tax exemptions they value so greatly.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC